An American judge has paved the way for the return of billions of dollars to former clients of the bankrupt FTX cryptocurrency exchange.
On Monday, at a court hearing in Wilmington, Delaware, Judge John Dorsey gave final approval to FTX’s reorganization plan, the terms of which had previously been presented to creditors and passed by majority vote.
“I think this is a model case for dealing with a very complex Chapter 11 proceeding,” Dorsey said. “I commend everyone involved in the negotiation process.”
FTX filed for bankruptcy in November 2022 after running out of funds to process customer withdrawals. Multi-billion dollar deposits from FTX customers have disappeared. The money, a jury later found, was taken by a sister company and spent on risky deals, venture bets, debt repayment, personal loans, political donations, luxury real estate and other illegal transactions.
A year later, FTX founder Sam Bankman-Fried was convicted of multiple counts of fraud and conspiracy and subsequently sentenced to 25 years in prison. In September, co-conspirator Caroline Ellison was sentenced to two years in prison after testifying against Bankman-Fried at trial.
First proposed in May, FTX’s bankruptcy plan lays out a path to full refunds plus interest for former FTX customers – a level of recovery rarely seen in bankruptcy cases. “Generally speaking, anything over 100 cents on the dollar is close to a miracle,” says Yesha Yadav, associate dean and bankruptcy specialist at Vanderbilt University Law School. “Typically what happens is that unsecured creditors get cents on the dollar if they are lucky. This is expected to be a process of scarcity.”
However, in this case, FTX’s wealth administrators managed to recoup billions of dollars by liquidating investments made by the exchange’s venture arm, FTX Ventures, and its sister company, Alameda Research, along with other assets. Meanwhile, the rise in cryptocurrency prices in the period since FTX’s bankruptcy announcement has raised the value of coins left at exchange counters.
Under the plan, U.S. government authorities – including the Internal Revenue Service and the Commodity Futures Trading Commission – agreed to suspend high-value claims against FTX until creditors are repaid (though the IRS will receive an upfront payment of $200 million in as part of the settlement).
Even FTX shareholders, typically the last to be paid off in bankruptcy, are able to recoup some of their initial investment – up to $230 million – paid by using funds recovered by the Department of Justice in its prosecution of FTX insiders.
However, despite the abnormally high expected economic recovery, some creditors believe that they are still receiving an unfavorable deal due to the way their receivables are valued.
Many clients held crypto assets such as bitcoin on the FTX platform, but through a process called dollarization, typical in bankruptcies, their claims were instead assigned a dollar value based on the price of those assets on the day the bankruptcy was filed. When FTX dropped, the cryptocurrency market was in a lull, but it has since hit up-to-date all-time highs, meaning some customer claims would be much more valuable if the return was attributed to the current value of the crypto asset. Therefore, while dollarization is appropriate under the Bankruptcy Code, he says [the return] exceeds 100 percent, it is simply wrong,” says Yadav. “For the average person, that’s a long way off.”